Heading into August of 2017, it is important to keep updated on what is happening in the ever-changing CREF (Commercial Real Estate Finance) market. The following is an update summarizing the four major lending categories:
Life insurance companies are typically “asset allocation” lenders. In other words, life companies invest a percentage of their assets into commercial real estate loans. Commercial real estate loans are held as long-term investments in addition to other investments such as high quality, investment grade bonds. Life Companies can offer fixed-rate loans from 3-30 years in duration. Benchmark 10-year fixed rate loans are currently being placed in the 3.50%-4.75% range depending on the risk profile of the transaction. Most life companies report that these yields are greater than what can be achieved by purchasing a comparable quality bond. Consequently, we continue to see strong demand for Life Companies to invest in the commercial real estate sector.
There have been multiple successful securitizations over the past 6-7 months, while the CMBS market continues to show consistency and strength. Spreads have contracted significantly over last 2 quarters, and there are signs of spreads flattening out. Over the last couple weeks, we have seen strength in AAA’s with spreads in the 90-91 range and BBB’s in the 350-spread range. A recent Commercial Mortgage Alert survey of CMBS shops is predicting spreads to continue this course for the balance of the year. We believe this translates to continued competitive pricing, with ten year fixed rates ranging from 3.85%-5.00%. Higher leverage and interest only loans are generally available but tend to price toward the higher end of the rate range. CMBS has also continued to perform as a strong resource for lower leverage loans with spreads dipping into the 165-185 range for select transactions that meet certain LTV and DSCR metrics.
Banks continue to be more conservative in their compliance departments and consequently with their underwriting. Banks will continue to pump the breaks for their CRE platforms and are focusing more in the multi-family and owner/user space. Borrowers in the owner/user and multi-family space will continue to see competitive pricing. Borrowers who focus in the CRE space will see some pull back and may benefit from looking at other financing sources. Banks in the CRE space are also leaning toward providing loans for investment grade single tenant properties and other local commercial assets where borrowers are focused on shorter term loans. Interest rates remain competitive with 5-year money in the 4.00% - 4.50% range.
We are seeing agency lenders continue to be aggressive with their production. According to a July 21, 2017 article in Commercial Mortgage Alert, “Fannie Mae and Freddie Mac are on track to set new records again this year for purchase of multi-family mortgages”. In particular there is continued demand for transactions in the affordable housing space where pricing waivers and full term interest only is readily available. Fannie’s long term 12 and 15 year fixed rate options, at slightly wider rates than their 10-year term, appear to be attracting more borrowers. Fixed interest rates range from low 4% to 5% depending on the length of term and leverage, while we still are seeing high 2% to high 3% money for floating rate options.
Bridge loans are another area of emphasis for the agency lenders and we expect that to continue through the balance of 2017 as Fannie continues to roll out their Fixed Rate Rehab program.
Finally, there is additional focus on “going green”. The Agencies, specifically Fannie, are aggressively pushing their green incentive program. Freddie is also focused on pushing similar “green” products for properties constructed in 2002 and later.